Tax day should be a day of mourning in the United States.
The federal government rakes in money from those living on its soil, both citizens and non-permanent residents, in such an arbitrary and capricious way that is both unfair and unjust.
ProPublica just released another analysis of leaked tax returns from the IRS showing that from 2013 to 2018, the 400 Americans reporting the most income – Bill Gates, Michael Bloomberg, Jan Koum, Ken Griffin, etc. — paid income tax rates well below the top tax bracket rate of 37% or even often below the supposedly fail-safe Alternative Minimum Tax rate of 28%. Bloomberg clocked in with the lowest effective tax rate at just 4.1%, Gates 18.4%, Koum 19.1%, and Griffin 29.2%.
Notably, Coloradans Stan Kroenke and his wife Ann Walton Kroenke made the list and paid an average effective tax rate of 14%.
The average effective income tax rates for those making between $40,000 and $50,000 was 5% during those years and for those making between $200,000 and $500,000, it was 29%, according to ProPublica.
And yet, there is zero political will to fix the problem.
Enter Colorado Gov. Jared Polis.
When details of his low tax bills were released by ProPublica in November, The Denver Post wrote an editorial calling for Polis, who paid an average tax rate of 8.2% from 2010 to 2018 and was not on the list of 400 top earners, to help us fix the broken tax code.
To his credit, the governor took us up on the offer. He sat down with The Denver Post to detail how he was able to pay so little in federal income taxes, and what can be done to fix the tax code.
The answer is relatively simple, considering the tax code is estimated to be at least 70,000 pages: net operating loss deductions and the reduced tax rate (15% to 20%) on capital gains. Polis is a proponent of reducing the generous net operating loss deduction and taxing capital gains at the same rate as any other income.
Like many of the individuals on ProPublica’s top 400 analyses, Polis is an entrepreneur, predominately in the tech industry. Polis has never drawn a traditional salary from companies, the kind that would generate a W2, but rather his money came in big tranches of cash either when his businesses went public or sold.
“I started a Spanish movie theater chain, lost most of my money in that, two restaurants, two or three other tech companies that failed,” Polis said. “As any entrepreneur, three successes is considered really good, many are happy with one or two, so I’ve had probably 12 failures and three successes.”
On his successes – like the 2005 and 2007 public offerings and sale of ProFlowers – Polis said he paid “big taxes” roughly 20% capital gains on millions of dollars in income. Polis said that money should have been taxed as regular income, which at the time would have been 35%.
On his losses – like the approximately $9 million loss on a single start-up around 2009-2010 — Polis could then deduct those losses from future income (it’s important to note that Polis donated his salary while he was in Congress and had relatively little capital gains income from his assets in a blind trust and other money from legacy investments in the start-up incubator TechStars).
Polis’ taxes fall under the alternative minimum tax system where he isn’t able to use some deductions (including those from his family business Jovian Holdings, mortgage interest or state and local taxes), but he is still able to use the alternative net operating loss deduction and also deduct charitable contributions.
“You can see why in the same year it’s obvious you should – you make $3 million here you lose $2 million there you really made a million; you can even argue why maybe just because it’s a different calendar year. But clearly, there needs to be either a time limit on it or you could just step it down over time,” Polis said.
He wants to be clear that he never used the “egregious” loophole whereby some extremely wealthy individuals forego even capital gains when they have a major taxable event, by instead borrowing money on unrealized investments.
“You can actually borrow against your gain instead of recognizing it and then you … pay a low-interest rate of 2% but that is lower than paying 20% all at once,” Polis explained. His solution? Tax as ordinary income money that is received as a loan based on a person’s net-worth.
Both Jeff Bezos and Elon Musk were able to avoid significant federal income taxes by living off of loans rather than realizing gains and paying taxes. Musk recently was forced to sell stocks and pay capital gains tax but only because he got squeezed by a loan payment coming due and the opportunity to exercise stock options.
Other reasonable measures would be to disallow tax deductions on donations that go to a family foundation or to reduce the allowable deduction to 50% of the donation, giving the wealthy an incentive to direct their donations directly to charities rather than funneling them through a foundation that can blur the lines between charity and a small business pays executives a lot to give out what remains once their salaries, retirement and expenses are paid.
These are simple fixes within the existing tax code that could start making it so America truly has a graduated tax system that is not regressive and is not balanced on the backs of upper-middle-class Americans. Congress can get this done by August if others take the moral high ground, as Polis has done, and talk openly about their tax advantages and how to make the system fairer.
Tax day could be a celebration in a wealthy country where everyone pays their fair share.
To send a letter to the editor about this article, submit online or check out our guidelines for how to submit by email or mail.